MINI-COURSE SERIES
ESTATE PLANNING Part IV
Copyright Š 2012 by Institute of Business & Finance. All rights reserved.
ESTATE PLANNING
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PROBATE Probate is the legal process that includes: [1] filing the deceased’s will with a local court, [2] identifying and inventorying the deceased’s property, [3] having that property appraised, [4] paying off debts, including estate tax—if any, [5] having the will proved valid to the court, and [6] eventually, distributing what is left as the will directs. If the deceased did not leave a valid will and the deceased did not leave the property in any other way, such as through a living trust or joint tenancy, the estate must still go through probate. Property is distributed to immediate family members as state law (intestate succession) dictates. People who defend probate assert probate prevents fraud in transferring a deceased’s property. In addition, they claim it protects inheritors by promptly resolving claims creditors have against a deceased’s property. However, most property is transferred within a close circle of family and friends; few estates face creditors’ claims. In fact, the great majority of creditors’ claims are filed by the funeral industry, which has learned to use probate as a collection device. In short, most people have no need of probate’s socalled benefits. Actual probate functions are essentially clerical and administrative. In the vast majority of probate cases, there is no conflict, no contesting parties, none of the normal reasons for court proceedings. Likewise, probate does not usually call for legal skills. Instead, the family or other heirs of the deceased provide a copy of the deceased’s will and financial information. The attorney’s secretary then fills in forms and keeps track of filing deadlines and other procedural technicalities. In some states, the attorney makes a couple of routine court appearances; in others, the whole procedure is handled by mail. There is so much money in the probate business that some lawyers hire probate form preparation services to do all the real work. In most instances, the existence of these freelance paralegal services is not disclosed to clients, who assume lawyers’ offices at least do the paperwork they are paid so well for. A typical probate takes up to a year or more. Probate usually requires both an executor and someone familiar with probate procedures, normally a probate attorney. The executor is responsible for making sure the will is followed. The executor hires a probate lawyer to do the paperwork. After that, the executor does little more than sign where the lawyer directs.
Probate Fees For their services, the lawyer and the executor are each entitled to a hefty fee from the probate estate. Many executors do not accept a fee, especially if they inherit much of the property anyway. In many states, the fees can be whatever a court approves as “reasonable.” In 1997, the U.S. Tax Court allowed an attorney’s probate fee of $1,600 per hour for a total of $368,100. PART IV
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In a few states, the fees are a percentage of the estate subject to probate. Either way, probate attorney fees for an uncomplicated estate with a value of $500,000 can amount to $10,000 to $15,000+. In addition, there are court costs, appraiser’s fees, and other possible expenses. If there are any extraordinary services performed for the estate, the attorney or executor can often ask the court for additional fees. Some lawyers even persuade clients into naming them as executors, enabling the lawyers to hire themselves as probate attorneys and collect two fees—one as executor, one as probate attorney. One way to reduce probate fees would be for the executor to appear in court without an attorney (in pro per) as the estate’s representative. A few states do not permit the executor to act without a lawyer. In fact, the only states in which it is a reasonable option for most people are California and Wisconsin. In other states where in pro per action is possible, there are no comprehensive published materials nor is other help available to nonlawyers. Moreover, court clerks and judges are likely to be unsympathetic. Legal secretaries typically copy necessary forms and follow procedures set out in lawyer practice manuals. In all states, rather than trying to save money by not using an attorney, it generally makes more sense to see if one can avoid probate at least for the bulk of the property. This approach involves transferring the major items of the estate (e.g., home, brokerage account, etc.) outside of probate. Most states exempt small estates from probate. The limits vary from state to state. If some of the estate will be subject to probate, the estate’s executor can try to reach an agreement with an attorney to do the probate for less than the conventional fee. The major probate-avoidance methods are [1] revocable living trusts, [2] joint tenancy and tenancy by the entirety, [3] pay-on-death designations (bank and brokerage accounts—plus vehicles and real estate in several states), [4] life insurance, [5] retirement accounts that go to a designated beneficiary, [6] state laws that exempt from probate certain amounts of property left by will and [7] gifts made while alive.
Informal Probate Avoidance Some ask, “Why not just divide up deceased’s property as the will directs and ignore the laws requiring probate?” Some small estates are undoubtedly disposed of this way, directly and informally by family members. For this type of informal procedure to work, the family must be able to gain possession of all the deceased’s property, agree on how to distribute it, and pay any creditors.
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Gaining possession of property is not difficult if there is nothing but personal effects and household items. However, if real estate, securities, bank accounts, or other property bearing legal title papers, such as cars and boats, are involved, informal family property distribution cannot work. For example, a title to a house must be done by preparing, signing, and recording a deed transferring title to the heirs. One good rule is that whenever outsiders are involved with a deceased’s property, do-it-yourself distribution by inheritors is not feasible. Another stumbling block can be getting family members to agree on how to divide the deceased’s possessions. If there is a will, it may not be a problem, since the will acts as a legal blueprint for distribution. If there is no will, things can be difficult. One alternative is for the family to look up and agree to abide by state intestate succession rules, which specifically cover situations in which there is no will. Or in either case, the family may simply adopt their own mutually agreed-on settlement.
When Probate May Be Desired If the estate owes a lot of debts, probate may be a good idea. Most estates do not involve complex creditor problems. Most deceased people leave little more than conventional household debts: mortgages, utilities, auto loans, and credit cards. Probate is not necessary to handle these debts. But if there is a significant risk that many creditors, especially those owed large sums, will make claims against the estate, probate can be advisable, especially if the executor will contest one or more of these claims. If the client owned a failing business or was involved in complicated financial transactions or complex litigation, probate can provide benefits because it provides a readymade court procedure for resolving creditors’ claims faster than by normal lawsuit. Creditors who are notified of the probate proceeding must file their claims promptly with the probate court, often within 4–6 months after probate begins, or they need not be paid. If one believes someone may challenge the estate plan in court, probate can be the most efficient way to resolve the conflict. Any estate planning device, whether it is a will, living trust, or any combination of legal methods, can be attacked by a lawsuit after death. The legal grounds for attack are quite limited. If one believes there is a risk the estate may be subject to legal attack, even by someone who has little chance of success, probate may be advisable as part of a plan to defeat that attack. Under probate law, only a brief time is allowed for attacking a will, and the people who witnessed the signing of the will should be able to testify the client was of sound mind. PART IV
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Debts and Taxes If an estate is probated, debts and taxes are paid before property is distributed to inheritors. Without probate, courts cannot ensure debts get paid. For most estates, there is no indication judicial policing is needed. Many people leave no significant debts, and even if some do, they normally leave assets to pay them. The primary financial obligations most people do have—mortgages on real estate or car loans—do not need to be paid off promptly after the owner dies. Normally, the person who inherits the asset becomes liable for the mortgage or loan. Mortgages or car loans pass with the property and do not need to be paid off separately. If no probate occurs, the deceased’s property remains liable for debts, including any estate tax. This is true even after the property is transferred to the heirs. If only one person will inherit, that person will be responsible for paying debts and any estate tax from the inherited property. If there are several inheritors, the responsibility for paying debts and taxes can, theoretically, become more confusing, but this confusion can be eliminated in advance. One way to do this is to allocate, in a living trust, specific assets to pay debts and taxes.
CELEBRITY ESTATE TAX CONSEQUENCES Estate
Taxes and Costs
% Passed to Heirs
$23,000,000
$6.8 million
70%
$910,000
$274,000
70%
Gary Cooper
$4,950,000
$1,500,000
70%
W. C. Fields
$885,000
$330,000
63%
Marilyn Monroe
$820,000
$449,000
45%
John D. Rockefeller
$26,900,000
$17,125,000
36%
J. P. Morgan
$17,121,000
$11,894,000
31%
Elvis Presley
$10,165,000
$7,375,000
27%
Walt Disney Humphrey Bogart
source: www.stricklen.com
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STATE EXEMPTIONS FROM PROBATE Many states allow small estates to be transferred free of probate or under a very simplified probate process. Many estates—worth hundreds of thousands of dollars—legally qualify as “small” and eligible for special transfer procedures that speed property to inheritors. There are two basic kinds of probate shortcuts for small estates: Affidavit procedure—no court required. If the total value of the property left behind is less than a certain amount, the people who inherit personal property (anything but real estate) may be able to skip probate completely. The exact amount ranges from $5,000 to $150,000, depending on the state. If the estate qualifies, an inheritor can prepare a short document stating she is entitled to a certain item of property under a will or state law. This paper, when signed under oath, is called an affidavit. When the person or institution holding the property—for example, a bank where the deceased had an account—receives the affidavit and a copy of the death certificate, it releases the money or other property. Simplified court procedures. Another option for small estates is a quicker, simpler version of probate. In some states, these procedures are easy to handle without a lawyer. In other states, one may need a lawyer and may face at least some attorneys’ fees, court costs, and delays. Most states have both kinds of procedures; some offer just one. The reason larger estates may qualify (as a small estate) is that when adding up the value of the estate, many states exclude large chunks of assets. For example, many states do not consider the value of vehicles, real estate, or real estate located in another state. Many states do not count the value of property that will not go through probate (e.g., titled in the name of a living trust, JTWROS, or is a POD account. Even if the estate qualifies for a simplified probate procedure, it will have no meaning unless executor knows the option is available. Many confused or intimidated executors turn everything over to a lawyer and inheritors pay the price.
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ESTATE PLANNING
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WARREN BURGER’S WILL Warren Burger was the 15th chief justice of the U.S. Supreme Court from 1969 to 1986. His complete will is shown below. As you can see, a will does not have to be lengthy. LAST WILL AND TESTAMENT OF WARREN E. BURGER
I hereby make and declare the following to be my last will and testament. 1.
My executors will first pay all claims against my estate.
2.
The remainder of my estate will be distributed as follows: one-third to my daughter, Margaret Elizabeth Burger Rose, and two-thirds to my son, Wade A. Burger.
3.
I designate and appoint as executor of this will, Wade A. Burger and J. Michael Luttig.
IN WITNESS WHEREOF, I have hereunto set my hand to this my Last Will and Testament this 9th day of June, 1994. [signed by Warren E. Burger]
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Possible Probate Avoidance Transfer Device
Avoids Probate?
Major Advantages
Drawbacks
Will
No, except in limited circumstances for small estates.
Easy to prepare; can serve other purposes, such as naming guardian for minor children. A good interim device to use until late in life.
Normally puts property in probate where inheritors face legal fees and other costs plus delays.
Living Trust
Yes
Complete control over property while alive; flexibility in providing for beneficiaries. Allows for property management if incapacity.
More trouble to establish than a will. Initial legal fees can be higher. More trouble to maintain than a will.
Joint Tenancy
Yes
Can be simplest probate-avoidance device to create.
Fine for long-term couples owning property together but usually not a good substitute for a living trust later in life, because each joint tenant can normally sell their interest. May be gift taxes if creating joint tenancy. May mean partial loss of stepped-up tax basis.
Tenancy by the Entirety
Yes
Easy to create
Available in some common law states; limited to married couples. Can be a problem if spouse incapacitated.
Community Property with Rights of Survivorship
Yes
Easy to create
Available in Alaska, Arizona, California, Nevada, Texas and Wisconsin.
POD Bank Accounts
Yes
Easy to create; no additional costs.
Limited to bank accounts and some government securities. Not a good idea when small children may inherit, since a property guardian will have to be appointed.
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ESTATE PLANNING
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Possible Probate Avoidance Transfer Device
Avoids Probate?
Major Advantage
Drawbacks
Transfer-on-death Car Registration
Yes
Easy to do
Available in California, Connecticut, Kansas, Missouri, Nevada and Ohio.
TOD for Securities
Yes
Easy to do
Not available in Texas.
Transfer-on-death for Real Estate
Yes
Easy to do
Available in Arizona, Arkansas, Colorado, Kansas, Minnesota, Missouri, Montana, Nevada, New Mexico, Ohio, Oklahoma and Wisconsin.
Naming Beneficiary to Pension Plan or Retirement Account
Yes
Generally easy to do
Limits can be imposed by policy or plan.
Life Insurance
Yes
Good way to provide quick cash for beneficiaries or to pay estate taxes. Proceeds do not go through probate.
If family members will not need immediate cash, the expense of policy may not be justified.
State Law Exemptions to Normal Probate
Yes
Can work well if state allows this method to be combined with other probateavoidance methods.
Only relatively small amounts of property qualify. Rules vary for each state. One has to understand state laws.
Dying Intestate, Without Creating Any Property Transfer Method
No
No effort required
Usually a bad idea. Property will be distributed according to state laws, not your wishes; executor and guardian for minors will be appointed by a judge.
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THINGS TO DO Your Practice Contact a high-end or respected clothing store (e.g., Neiman Marcus, Nordstrom’s, etc.) and ask about putting on a private showing of new clothes with your clients. You can introduce the showing by talking briefly about your practice or a few of your favorite investment strategies. In the alternative, you can postpone any discussion until during a luncheon you may want to schedule after the private showing. Learn Are you ready to take your practice to the next level? Contact the Institute of Business & Finance (IBF) to learn about one of its five designations: o o o o o
Annuities – Certified Annuity Specialist® (CAS®) Mutual Funds – Certified Fund Specialist® (CFS®) Estate Planning – Certified Estate and Trust Specialist™ (CES™) Retirement Income – Certified Income Specialist™ (CIS™) Taxes – Certified Tax Specialist™ (CTS™)
IBF also offers the Master of Science in Financial Services (MSFS) graduate degree. For more information, phone (800) 848-2029 or e-mail adv.inv@icfs.com.
PART IV
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